Curtailing the Tax (Part 1) - Deductible Allowances

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The prime interest and aim of any prudent and rational tax payer would always be to reduce the impact of taxes on his income, turnover and in some cases his expenses for instance tax on electricity bills, tax on vehicle registration e.t.c. as the case maybe.

To achieve this objective while remaining within the parameters of law it is important to have an understanding of the following provisions under the Income Tax Ordinance, 2001:

1) Deductible Allowances;
3) Reduction in Tax Liability; (Will be discussed in part 3 of this series)

The above concepts are the prime areas which allows taxpayers to take benefit of and reduce their tax liability besides exemptions and concisions and immunities provided elsewhere in the Income tax Ordinance, 2001.

This blog is the first part of this series and we are going to review the basic concept of Deductible Allowances under the Income Tax Ordinance, 2001.

Deductible Allowances (Section 60)


These are the allowances which are allowed to be deducted directly from the taxable income before arriving the final tax liability.

The following mechanism and treatment of deductible allowance is explained in section 9 of the Income Tax Ordinance, 2001.

Taxable Income = Total Income – Exempt Income – Deductible Allowance

Following are the various deductible allowance prescribed under the Income Tax Ordinance, 2001:

1) Zakat (Section 60);
2) Workers Welfare Fund (Section 60A);
3) Workers Participation Funds (Section 60B);
4) Deductible Allowance for Profit on Debt (Section 60C);
5) Deductible Allowance for Educational Expenses (Section 60D);

Zakat (Section 60): 

Any Zakat under Zakat and Ushr Ordinance, 1980 shall be considered as a deductible Allowance. Any unclaimed Zakat cannot be carried forward in subsequent years.

Exception: Any Zakat which is deducted from ‘profit on debt’ falling under the head “Income from Other Sources” shall be claimed separately from such head of income at the time of payment of such profit.

Workers Welfare Fund (Section 60A);

A person shall be entitled to a deductible allowance for the amount of any Workers‘ Welfare Fund paid by the person in tax year under Workers‘ Welfare Fund Ordinance, 1971.

Workers Participation Funds (Section 60B);

A person shall be entitled to a deductible allowance for the amount of any Workers‘ Participation Fund paid by the person in a tax year in accordance with the provisions of the Companies Profit (Workers‘ Participation) Act, 1968.

Deductible Allowance for Profit on Debt (Section 60C);

Every ‘individual’ shall be entitled to following deductible allowances where the individual utilizes the loan for the construction of a new house or the acquisition of a house: 

- Any Profit;
- Any Share in rent; or
- Any Share in Appreciation of value of such house

Paid by the individual against any loan by following:

- Scheduled Bank; or 
- Non Banking Finance Institution 

regulated by SECP, Advanced by Government or the Local Government, Provincial Government or a statutory body or a public company listed on a registered stock exchange in Pakistan 

LIMIT – The deductible allowance on above mentioned profit on debt shall be lesser of following:

- 50% of taxable income; or
- Rs. 2,000,000/-

Deductible Allowance for Educational Expenses (Section 60D)

An ‘individual’ whose taxable income is below Rs. 1,500,000 shall be entitled to a deductible allowance of any tuition fees paid by him.

LIMIT – The deductible allowance on above mentioned tuition fees shall lesser of following:
- 5% of tuition fees;
- 25% of taxable income;
- Rs. 60,000 X No. of Children;

This allowance can not be carried forward in subsequent years.

Allowance under this section shall not be taken into account for computation of tax deduction under Salary income.


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